It would have surprised no one that the so-called “independent” expert assessing the fairness of the Macquarie Airports internalisation deemed that the $345 million bounty being paid to Macquarie Bank was “fair and reasonable having regard to the non-associated Securityholders”. KPMG’s approval of the proposed transaction is kind of like saying a thief who steals your wallet was being fair and reasonable because they didn’t shoot you afterwards.
In July, MAp (which makes around half of earnings from its majority ownership of Sydney airport, with the remainder is divided across minority interests in international airports located at Bristol, Copenhagen, Brussels and Tokyo) announced that it would be internalizing management. What this means is that instead of MAp paying an external entity (Macquarie Bank) to run its business, it would be operated by managers directly paid by securityholders. In 2007, MAp paid Macquarie “Responsible Entity and Adviser” fees of $90 million, last year, it paid $57 million. MAp’s 2008 Annual Report also noted that Bristol Airport also paid “Adviser Performance Fees” of $145 million in the past two years alone.
MAp listed on the ASX back in 2002 with its assets consisting of minority stakes in two English airports (it would acquire Sydney airport shortly after). MAp’s prospectus noted that Macquarie Airports was able to terminate the management agreement upon a majority vote of unitholders. Unsurprisingly, the prospectus made no reference to any $345 million fee should Macquarie’s management be terminated.
Since listing, Macquarie has charged MAp shareholders $546 million for providing its management expertise. That expertise involved scouring the globe looking to purchase other assets (which would of course generate more fees for Macquarie) and gouging customers, retail outlets and airlines as much as possible without raising the ire of regulators. Courtesy of Macquarie’s management expertise, Sydney Airport is now one of the most expensive in the world.
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MAp’s 2008 Annual Report noted that its executives “have significant skill and experience in capital management and investing in airports globally” and a “high quality management team…with a unique infrastructure investment track record.” The market does not seem to agree with this view – MAp units have fallen from $4.00 two years ago, to only $2.45 now. MAp’s market capitalisation of $4 billion is substantially less than MAp’s book value of $6.5 billion. It appears that Macquarie has a far higher opinion of its managerial abilities than the market.
But back to the internalisation, which will cost MAp unitholders another $345 million to get rid of the fee-wresting Macquarie Bank from their lives once and for all. According to KPMG, paying their manager $345 million to go away is fine, because without the blackmail, sorry, break fee, Macquarie can do all sorts of mean things to MAp. (Macquarie appears to have realized that no one will ever invest in one of their alleged Ponzi schemes again, so they might as well milk the pot as much as they can on the way out).
Specifically, MAp’s debt agreements provide for pre-emptive rights in the event of a change-in-control (and given the current debt markets, it would be virtually impossible for MAp to be able to refinance its loans on anywhere near as generous terms as it current has). In addition, MAp’s shareholder agreements in relation to its European airport equity stakes are also believed to include pre-emptive rights upon the change of ownership of a shareholder.
Therefore, while Macquarie can be sacked as a manager — it either unwittingly or knowingly negotiated poison pills in its debt and shareholder agreements which mean that in reality, the bank cannot be terminated without its cooperation. And that cooperation doesn’t come cheap. (In Macquarie’s defence, such preemptive clauses are usually standard in such agreements)
It should be remembered that Macquarie is internalising management at MAp (and potentially at Macquarie Infrastructure Group) not because it wishes to “spend more time with family”, but rather, because the market has lost all faith in Macquarie’s ability (and the associated cost) of it continuing to externally manage the entities.
Given the prevalence of pre-emptive rights attached mean that terminating Macquarie is too costly, it is even possible that MAp securityholders may have been better of had those assets been sold prior to any internalization. That would leave MAp with an interest in Sydney Airport and a $345 million saving.
It is however is difficult to feel too sorry for independent shareholders — putting it kindly, it is unwise in the extreme to purchase fractional ownership of a Macquarie satellite (the “gougee”) when one can simply acquire an ownership interest in the entity charging tens of millions each year to run what are essentially, monopoly assets (the ‘gouger’).
But caveat emptor aside, if it wasn’t already dead before — after the $345 million internalisation deal, someone had better call a Priest to read the last rites to the Macquarie Model.